ETS Forum – A tax would be better

Capping off dissensus and trading in disaster

A series of cascading questions need to be considered in order to answer the question “Are emissions trading systems a good or bad idea?”.

Firstly, we need to consider whether the globe is warming. Secondly, and if the answer to that is ‘yes’, we need to decide if humans are a major contributing factor. If that too receives a positive response then we should consider, thirdly, what can be done about it. Next, having put some sort of rough price tag on what has some plausible hope of being spent on the issue, we can ask whether the money could be better spent elsewhere. But if we do decide that that money should be spent on reducing carbon dioxide emissions, then we have to ask about the comparative costs of the main options on the table. Is cap-and-trade a better option than a carbon tax, given the obvious dangers the former poses of restricting new entrants, encouraging rent-seeking behaviour and generally just distorting the market — not to mention the comparative ease of unwinding a carbon tax compared to a carbon emissions scheme if it turns out down the road that we bungled at question two?

I’m just a lawyer who gets his main weekly dose of science from the pages of The Economist. I do have an interest in this issue though. And as a paid-up member of the Australian Skeptics (think of a group that demands evidence before believing and revels in mocking morons who believe in untested alternative medicine) I regularly read in their journal, The Skeptic, exchanges between far better qualified scientists than I on this issue. Plus I like to look on Climate Debate Daily, the sister website to Denis Dutton’s Arts & Letters Daily, where one gets fed a steady diet of both sides of the story by highly qualified scientists.

Given that reading background, I have no idea what to think on the second issue, though on the first one it seems pretty well agreed that the world has cooled of late, though opinions differ on whether that is just a blip in the upwards trend, or foreshadows cooling or a levelling off.  From my point of view what this issue appears to boil down to (no pun intended) is an issue of risk management. What is one’s appetite for risk? Will any potential risk cause you to undermine economic growth, or does it have to be, say, a one-in-four risk, or better than evens, or a demonstrably high danger?

Some proponents in this debate seem to me to be saying that if there is any risk at all of human caused global warming, any at all (no doubt dressed up in the obsfuscating term ‘precautionary principle’), then any price at all is worth paying.

Such persons and I part company at that stage.

But let’s say one thinks the risk is a moderate to severe one, no one (to repeat) knowing for sure and all of us trying to decide in a sea of uncertainty and conflicting opinions. We then have to decide if we can do anything in present circumstances or whether our efforts on behalf of the vulnerable part of the world are better devoted to spending on fresh water or anti-malaria programs or what have you. The more you are convinced the world’s Chinas and Indias have no intention of doing anything – and given their extremely low carbon output per head that is an understandable point-of-view – the more the Bjorn Lomberg line about spending your money elsewhere becomes attractive.

But no doubt lots of smart, reasonable, well-informed people will still figure that carbon dioxide reduction, as part of a risk management plan in a world where limited biological creatures can’t be sure about all sorts of things (not least the weather next year), needs to be attempted.

Assuming you get to that stage, it seems to me that cap-and-trade is a far, far, far worse choice than a straight up carbon dioxide tax, together with an all-out shift towards nuclear power. The problem with cap-and-trade is not just that it will restrict new entrants, encourage rent-seeking behaviour, distort the market (which, I concede, won’t bother Mr. Rudd), and be far harder to unwind than a carbon tax should it turn out our precautions were unnecessary. No, the main problem is that we know going in that cap-and-trade won’t work, or rather that any program that manages to get passed will be so shot full of holes that it won’t achieve anything much in the way of reducing carbon dioxide emissions. (I grant that it will create a big bureaucracy and kill jobs.)

In the United States even the Director of their Environmental Protection Agency has conceded that their present cap-and-trade Bill will have no effect on future climate and will not reduce carbon dioxide use. And it’s a safe bet that whatever gets through Parliament here (given the job losses of a stringent program) will be similarly enervated.

So forget about the oddness of a small minnow of a country like Australia thinking it ought to lead the way on this global warming issue. And forget the real-life prospects, at least at present, of developing countries like China and India sacrificing economic growth for carbon reduction. Instead, ask yourself why people purporting to be serious about global warming as a risk management issue aren’t bending over backwards to move towards nuclear power accompanied by a straightforward carbon tax.

Presumably it can’t be because opting for a direct tax on carbon will make evident that jobs will be lost – any thinking person knows jobs will be lost, at least in the short-term.

I’m against cap-and-trade and Australia enacting its own such Bill for all of the above reasons, and because I think some people in favour of it are hypocrites. If global warming is such a big risk that it demands action, then it demands a carbon tax and nuclear power. 

James Allan is Garrick Professor of Law at the University of Queensland.